The document provides a collection of articles, papers, speeches and commentaries on various topics related to financial regulation and risk in North Asia. It includes pieces from prominent economists and academics such as Yanis Varoufakis, Stephen Roach, Joseph Stiglitz, and Steve Keen. The document also provides regulatory updates, book reviews, and advertisements for upcoming seminars and training events related to financial risk management.

1. Articles, Papers & Speeches
US Federal Reserve’s financial services stability agenda Lael Brainard
CCP risk management, recovery and resolution arrangements David Bailey
Looking ahead as the Renminbi internationalises Alexa Lam
If Europe wants growth, reform its financial services system NicolasVéron
Is the concept of “moral hazard” a myth or reality? Philip Pilkington and Macdara Dwyer
Why “bail-in” securities should be considered fool’s gold Avinash D.Persaud
After AQR & stress tests, where next for EU-banking? Thorsten Beck
City of London determined to plumb new depths William K.Black
Compliance with risk targets: efficacy of the Volcker Rule Josef Korte and Jussi Keppo
Higher capital requirements: the jury is out Stephen Cecchetti
Will Basel III operate to plan as its proponents desire? XavierVives
Helicopter money can reverse the present economic cycle Biagio Bossone
US regulatory feeding frenzy on HFT is wholly misguided Steve Wunsch
Derivatives markets in China to be built upon G20 reforms Sol Steinberg
China’s securities industry to undergo metamorphosis Andy Chen
Accounting hurdles for CVA in the region YinToa Lee
CVA “pricing”issues across Asia Pacific Ben Watson
VolumeVI,Issue 4 –Winter 2015
JOURNAL OF REGULATION & RISK
NORTH ASIA
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3. Journal of Regulation & Risk North Asia 1
Editor Emeritus
Prof. Stephen (Steve) Keen
Editor-in-Chief
Christopher D. Rogers
Editor
Rachel Banner
Sub Editor
Macdara Dwyer
Editorial Contributors
Amit Agrawal, David Bailey, Thorsten Beck, William K. Black, Biagio Bossone,
Lael Brainard, Stephen Cecchetti, Rowan Bosworth-Davies, Andy Chen, Jose-
phine Chung, Macdara Dwyer, Stuart Holland, Sara Hsu, Steve Keen, Jussi Kep-
po, Josef Korte, Alexa Lam, Yin Toa Lee, Paul McPhater, Bart Naylor, Avinash
P. Persaud, Philip Pilkington, Alex J. Pollock, Stephen S. Roach, Sol Steinberg,
Joseph Stiglitz, Mayra Rodríguez Valladares, Yanis Varoufakis, Nicolas Véron,
Xavier Vives, Ben Watson, Steve Wunsch, Erinç Yelden
Design & Layout
Lamma Studio Design
Printing
DG3
Distribution
Deltec International Express Ltd
ISSN No: 2071-5455
Journal of Regulation and Risk – North Asia
23/F, Suite 2302, New World Tower One, 16-18 Queen’s Road,
Central, Hong Kong SAR, China
Tel (852) 8121 0112
Email: christopher.rogers@irrna.org
Website: www.irrna.org
JRRNA is published quarterly and registered in Hong Kong as a Journal. It is
distributed free to governance, risk and compliance professionals in China,
Hong Kong, Japan, South Korea, Philippines, Singapore and Taiwan.
© Copyright 2015 Journal of Regulation & Risk - North Asia
Material in this publication may not be reproduced in any form or in any way
without the express permission of the Editor or Publisher.
Disclaimer: While every effort is taken to ensure the accuracy of the information herein, the editor
cannot accept responsibility for any errors, omissions or those opinions expressed by contributors.

5. Journal of Regulation & Risk North Asia 3
Volume VI, Issue 4 – Winter 2015
Contents
Foreword – Prof. Stephen (Steve) Keen 7
Acknowledgements – 9
Q&A –YanisVaroufakis 11
Opinion – Stephen Roach 15
Opinion – Alex J. Pollock 19
Opinion – Rowan Bosworth-Davies 23
Opinion – Stuart Holland 29
Book review – Bart Naylor 31
Book précis – Steve Wunsch 33
Letter from an economist – Steve Keen 37
Comment – Sara Hsu 41
Comment – Mayra Rodríguez Valladares 43
Comment – Erinç Yelden 45
Comment – Joseph Stiglitz 47
Advisory – Amit Agrawal 49
Advisory – Paul McPhater 53
Regulatory update – Josephine Chung 57
Articles, Papers & Speeches
US Federal Reserve’s financial services stability agenda 65
Lael Brainard
CCP risk management, recovery and resolution arrangements 73
David Bailey
Looking ahead as the Renminbi internationalises 79
Alexa Lam
If Europe wants growth, reform its financial services system 87
NicolasVéron
Is the concept of “moral hazard”a myth or reality? 95
Philip Pilkington and Macdara Dwyer
JOURNAL OF REGULATION & RISK
NORTH ASIA

6. regulationasia.com
To join the conversation, learn more and stay ahead visit

7. Journal of Regulation & Risk North Asia 5
Why“bail-in”securities should be considered fool’s gold 101
Avinash D.Persaud
After AQR & stress tests, where next for EU-banking? 111
Thorsten Beck
City of London determined to plumb new depths 115
William K.Black
Compliance with risk targets: efficacy of theVolcker Rule 121
Josef Korte and Jussi Keppo
Higher capital requirements: the jury is out 125
Stephen Cecchetti
Will Basel III operate to plan as its proponents desire? 129
XavierVives
Helicopter money can reverse the present economic cycle 133
Biagio Bossone
US regulatory feeding frenzy on HFT is wholly misguided 137
Steve Wunsch
Derivatives markets in China to be built upon G20 reforms 143
Sol Steinberg
China’s securities industry to undergo metamorphosis 147
Andy Chen
Accounting hurdles for CVA in the region 151
YinToa Lee
CVA“pricing”issues across Asia Pacific 157
Ben Watson
Articles (continued)

8. 11597 LN Full Pg Ad A4.indd 1 8/21/14 10:39 AM

9. Journal of Regulation & Risk North Asia 7
Foreword
THOUGHnumerousopinionsonhowtodealwiththeEuropean
economic crisis have been expressed in social media, only the
consensus view in favour of austerity has been aired within the
European Union’s formal bodies.
That will now change after the Greek elections that brought
Syriza (and its coalition partner Independent Greeks) to power.
Austerity will be opposed,not merely on political grounds,but on
the basis of its appropriateness as an economic policy as well.
Given the history of Greece’s entry into the Eurozone, there is a danger that this debate
will be sidelined by historical issues, by arguments over the morality of Greece seeking debt
forgiveness given this history,and by assertions that Greece’s problems reflect its administra-
tion and corruption,rather than austerity.
This would be a mistake.The election of Syriza should instead be an opportunity to turn
the debate towards the two key economic issues: what caused the economic crisis of 2008;
and what is the best way to end the economic depressions afflicting both Greece and Spain,
and the stagnation affecting the rest of the Eurozone?
This is also the time to abandon rigid adherence to previously agreed policies, simply
becausetheywereagreedtointhepast.Wenowhavehalfadecadeofexperiencewithwhich
to assess the effectiveness of those policies, and with the election of Syriza we now have a
test of how politically sustainable those policies are as well. Neither augur well for business
as usual.The depth and duration of the downturn caused by austerity were far greater than
predicted.The election of an anti-austerity party in Greece – and the likelihood that this will
be followed by other victories in other countries this year – shows that sustained economic
austerity is not politically sustainable.
Since austerity has proven neither effective nor sustainable,then Europe has to work out
policies that are.To do so, empirical knowledge, sound logic, and the dispassionate consid-
eration of alternative ideas must rule the debate.This journal is a contribution to that end.
Prof. Stephen (Steve) Keen
Editor Emeritus

10. Day 1
OIS Discounting
• Introduction to OIS
• OIS Curve Construction
• OIS and CSA Pricing
• Decomposing OIS and CSA Risk
• Managing OIS/CSA Risk
• OIS Migration Steps
Day 2
Counterparty Credit Risk & CVA
• Introduction to Counterparty Credit
• Quantifying Counterparty Exposures
• Probability of Default
• Credit Value Adjustment (CVA)
• Wrong-Way Risk (WWR)
• Managing CVA Risk
Who Should Attend?
Anyone that needs to know how the introduction of OIS and CVA will impact them and their
organisation. This includes Traders, Trading Management, Sales, Operations, Middle Office, Finance,
Risk Management, Technologists, Technology Management, Business Management, Credit and
Collateral Management, Quantitative Analysts, Consultants and Brokers.
For more details or a brochure, please email Ben directly
ben.watson@maroonanalytics.com or visit our
website www.maroonanalytics.com
Both OIS Discounting and the Credit Value Adjustment create complexity for banks for different
reasons. OIS discounting is an organisational challenge whereas CVA is a technical challenge.
This 2 day workshops will provide you with the tools to be able to understand the challenges and
opportunities OIS and CVA present.
This workshop is led by Ben Watson. Ben has worked for more than 20 years
as a quantitative analyst in investment banking. Until 2012 he was the APAC
head of Quantitative Analytics a global Investment Bank. Today Ben is the
CEO of Maroon Analytics Australia, a consultancy that specialises in providing
quantitative solutions to banks, financial institutions and corporates. From 2011
to 2013, Ben was heavily involved with a successful OIS migration at a Global
Investment Bank.
OIS Discounting and Counterparty
Credit Risk Workshop
Hong Kong
27th & 28th of May 2015

11. Journal of Regulation & Risk North Asia 9
Acknowledgements
THE editorial management team of the Journal of Regulation and Risk – North Asia
could not have published this edition of the Journal without a great deal of as-
sistance and advice from professional associations, international monetary and
financial bodies, regulatory institutions, consultants, vendors and, indeed, from
the industry itself.
A full list of those who kindly assisted with the publication of this issue of the
Journal is not possible, but the Editor-in-Chief and Editor would like to extend a
special thank you to Prof. Stephen (Steve) Keen, Head of Economics, History and
Politics, Kingston University London, for his generous assistance in generating
copy for this edition of the Journal; specifically, arranging the Q&A with Prof.
Yanis Varoufakis and opinion piece from Stuart Holland. Further thanks must also
be extended to the following organisations and institutions for their generous assistance,
support and permission in allowing the Journal to reproduce articles and papers from
their respective publications and online websites: the Board of Governors of the US Fed-
eral Reserve System; the Bank of England; the Hong Kong Securities and Futures Com-
mission; New Economic Perspectives; Dealbook, The New York Times; Triple Crisis;
Project Syndicate; VoxEU; the Peterson Institute for International Economics; MRV As-
sociates; and TabbForum.
Detailed comments and advice on the text and scope of content from Amit
Agrawal; Assoc., Prof. William K. Black; Macdara Dwyer; Sara Hsu; Prof. Thor-
sten Beck; Fanny Fung; Ben Watson; Les Kovach; Dominic Wu; Steve Wunsch;
Erinç Yelden, together with Michael C.S. Wong and Phillip Dalhaise of CTRisks.
Further thanks must also go to the China Banking Regulatory Commission,
Hong Kong Institute of Bankers, the Beijing & Shanghai Chapters of the Profes-
sional Risk Managers International Association and the Hong Kong Chapters of
the Global Association of Risk Professionals and Institute of Operational Risk
Management, Asia Financial Risk Think Tank, together with SWIFT and Wolters
Kluwer Financial Services, for their kind assistance in helping to distribute the
Journal to their respective memberships and client-base in Greater China, Japan,
South Korea, Philippines and Singapore.

12. COLLATERAL MANAGEMENT, COUNTERPARTY RISKAND CVA
1 - DAY CPD CERTIFIED SEMINAR
June 23rd 2015 8.30am – 5.00pm
Hong Kong
HUNT FINANCIAL TRAINING LTD
108 Alexandra Park Road, London N10 2AE
www.hunt�inancialtraining.com
CPD Af�iliate Member NO: 7025
It is critical for you and your business, in the current regulated financial market to have
up to date knowledge of Collateral Management, Counterparty Risk and CVA.
This seminar, led by Chris Hunt, along with other leading industry experts, will help you
understand the key concepts, values, risks and processes undertaken by leading players
in the marketplace today.
Chris Hunt has extensive experience in the
Collateral, Counterparty Risk and CVA space,
having worked in that field at UBS as well as at
Fortis, Barclays Capital and Standard Chartered
Bank. Chris holds an MBA from the London
Business School.
For further details on Chris please visit
www.huntfinancialtraining.com
CPD certified certificate
no 7025T1
S1: Introduction to Collateral
Management, Counterparty Risk and
CVA
S2: Transforming Collateral into a Profit
Centre
S3: Panel session with industry experts
focused on regulation
S4: Central Clearing and Basel 3
S5: Guest Speaker
Full agenda available on website
Q. What am I going to learn from this course and how will I be able to apply it?
A. A good understanding of the areas of collateral, risk management and CVA and the interconnectivity between
them. In addition, the participant will gain an understanding of the questions firms should be asking and how they
need to develop their processes and infrastructure to capture and price risk accurately. The cost implications in this
space are huge, and substantial savings are available to those that plan well and ask the right questions.
Q. Who should attend this course?
A. Collateral Managers or Risk or Treasury professionals; IT professionals involved in building systems in this space;
those wanting to get a broad understanding of these areas and their interconnectivity.
Full FAQ available on website

13. Q&A
End of the Euro is nigh without
radical EU-wide reforms
Abruised and battle-wearyChrisRogersraises
a flagof truce,followinganencounterwith
University of Athens economist,YanisVaroufakis.
IT’S not often one gets to interact per-
sonally with their heroes, so it was with
great relish and delight that I grasped
an opportunity to engage in intellectual
swordplay with one of Europe’s lead-
ing heterodox economists and political
activist in his homeland, Professor Yanis
Varoufakis of the University of Athens -
courtesy of the Journal’s new honourary
“Editor Emeritus”, Professor Steve Keen
of Kingston University.
Before moving to the Question and Answer
section of this article, it’s necessary to give
a brief introduction to Prof. Varoufakis for
those unfamiliar with his work and personal
background;acareergreatlyimpactedbythe
2008 financial crisis and subsequent woes of
hiscountryofresidency,Greece,wherepres-
ently he’s running for election to the Greek
Parliament as a standard-bearer of the the
Greek political reform movement,SYRIZA.
A duel-citizen of Australia and Greece,
Prof.Yanis attended university at Essex and
BirminghamintheUKandwasawardedhis
PhD in economics also from the University
of Essex.He began his professional career as
a university lecturer, influencing undergrad-
uatesandpostgraduatesonthreecontinents.
Leading critic of economic orthodoxy
A prolific author and committed blogger,
Prof. Varoufakis has published numerous
academic papers and two seminal books on
the 2008 financial crisis and its aftermath,
these being The Global Minotaur: The True
Origins of the Financial Crisis and the Future of
the World Economy, London and NewYork:
Zed Books; and Modern Political Economics:
Making sense of the post-2008 world, London
andNewYork:Routledge,(withJ.Haleviand
N.Theocarakis) 2010.
A leading figure in the heterodox eco-
nomics movement and vociferous critic of
economic and monetary policy conducted
after the GFC on both sides of the Atlantic
Ocean, Prof.Varoufakis is much in demand
by journalists and on the international
speakers’ circuit. As such, the staff of the
JournalandIthankProf.Varoufakisfortaking
valuable time out from the Greek Election
campaign to share his valuable insights with
ourreaders.ThefulltextoftheQ&Aappears
overleaf:

14. Journal of Regulation & Risk North Asia12
Chris Rogers: Prof. Varoufakis, since the
demise of Lehman Brothers in September
2008 and the ensuing great financial crisis
(GFC), it would seem rather obscene that
central bankers and monetary policy have
been obsessed with“deflation”, rather than
remedying the actual causes of the crisis
itself.Is this a fair analysis?
Transferring losses
Prof. Varoufakis: Central bankers and pol-
icy makers were obsessed not so much with
deflation but with transferring the losses
of financial institutions onto the shoulders
of citizens. When this transfer produced
deflationary forces, only then did they enter
into Quantitative Easing (QE) territory in
an attempt to stem them. Since then, they
have been trying to contain deflation with-
out doing anything that might restore a
modicum of bargaining power to labour or
income to the dispossessed.
Chris Rogers: Given collapsing global oil
prices, an emerging car loan subprime cri-
sis brewing in the United States, slowdown
in China and continued economic woes in
Japan,together with fears over Greece ignit-
ing another round of sovereign debt crisis
within the European Union, is it fair to say
we may be entering a perfect storm again
and a repeat of events similar to those wit-
nessed in 2008?
Major discontinuity
Prof. Varoufakis: Whether the next phase
of the global crisis will take the form of a
major discontinuity or a slow burning, ever
increasing loss of socio-economic poten-
tial is not something that we can predict.
What is clear is that,under the current policy
mix, the world is facing either what [Larry]
Summers described as secular stagnation or
another Lehman moment.Not a great set of
options.....
Chris Rogers: Turning to the EU and the
Eurozone itself, would it be prudent for the
EU Commission and European Central
Bank to countenance the rapid introduc-
tion of a two-tier Euro, specifically a“hard”
Eurozone with Federal Germany at its helm,
and a“soft”Eurozone headed by France?
1930s comparisons
Prof. Varoufakis: If Europe continues the
way it is now going, there will be no soft
and hard euro.The euro will disintegrate,the
result being a Deutsch mark zone east of the
Rhine and north of the Alps and an assort-
ment of national currencies everywhere else.
The former zone will be gripped by deflation
and the latter by stagflation.
Chris Rogers: With reference to the second
question and your response, is it correct, as
many now argue, that the economic and
social ramifications of the 2008 great finan-
cial crisis are greater in many G20 nations
today than those suffered during the Great
Depression of the 1930s?
Prof. Varoufakis: It is not useful to make
such comparisons. While it is true that the
crisis transmission mechanisms are more
poignant now than then, let us not forget
that 1929 set in train the process leading to
the carnage of the the Second World War:
hardly a minor repercussion.
Chris Rogers: Back to European matters

15. Journal of Regulation & Risk North Asia 13
and the development of a nascent bank-
ing union within the EU. Do you believe it
wise of political and economic policymakers
to concentrate on a“banking union”when
centrifugal forces within the EU are growing,
rather than dissipating,presently?
Death embrace continues
Prof. Varoufakis: A banking union would
be a godsend. It would break up the death
embrace between insolvent banks and
insolvent states. Alas, we created a bank-
ing union in name so as to ensure it never
happens in practice. And so the said death
embrace continues.
Chris Rogers: Is it not the case that recent
USunemploymentfigures(December2014)
and the third quarter 2014 GDP growth fig-
ure of 5 per cent seem a little unbelievable,
particularly given that most statistical analy-
sis demonstrates all gains and that, since
the “supposed” US recovery, more within
the top 5 per cent have accumulated, at the
expense of the average Joe on Main Street?
Macro data prosper.....people suffer
Prof. Varoufakis: If you look at the US
labour market closely, you find that the
numberofAmericanswantingafulltimejob
and not having one has remained more or
less constant over the last few years.
Employment growth has not kept up
with labour supply which, in the United
States, rises faster than in Europe. As for
income growth, it is no great wonder that,
courtesy of low investment and QE, asset
priceincreasesandsharebuybacksboostthe
income of the top one per cent further,while
wages are languishing on a filthy floor. And
so macro data prosper while most people
suffer.
Chris Rogers: Since late 2014, and continu-
ing during the first weeks of 2015, we have
heard many Cassandra-like voices warning
of a Greek exit from the Eurozone, should
left of centre political parties gain power in
late January’s parliamentary election. Is this
view overstated and fearmongering,no less?
Prof. Varoufakis: It is pure fearmongering
for the purposes of dissuading Greek voters
fromvotingforSYRIZA.Itisthatcynical.The
powers-that-be know that Grexit (Greek
exit) would unleash destructive powers that
they cannot control. So they are bluffing,
hoping that Greeks will fall for this piece of
terrorasecondtime–after2012.Itlooksasif
they cannot fool the Greek voters twice.
EU, democracy-free zone
Chris Rogers: An economically prosperous
EU would seem essential for the wellbeing
of the global economy, given this assump-
tion.What exactly are EU policymakers and
the constituent member national govern-
ments thinking about in hailing austerity as
a panacea,rather than implementing a mas-
sive fiscal expansion similar in impact to that
of MarshallAid nearly 70 years ago?
Prof.Varoufakis:Youaremakingthewrong
assumption that EU officials are in the busi-
ness of promoting shared prosperity. I wish
that were true. No, they are in business of
perpetuating their bureaucratic author-
ity within an institution that was designed
as a democracy-free zone and as a media-
tor between various powerful, oligopolistic

16. Journal of Regulation & Risk North Asia14
vested interests for whom austerity is a
golden opportunity to maximise their social
power over the rest of society.And if gigantic
unemployment and a humanitarian crisis is
the result,so be it.....
Chris Rogers: A new Bretton Woods agree-
ment and re-imposition of capital controls
would seem more beneficial, rather than
all the supposed“free trade”orthodoxy we
keep hearing about from both sides of the
Atlantic.Would you agree?
Prof.Varoufakis:Capitalcontrolshaveeven
been adopted by the IMF,recently,as essen-
tial shock absorbers and stabilisers. A new
Bretton Woods agreement would need to
configure what I call a global surplus recy-
cling mechanism that prevents bubble-creat-
ing financial flows during the“good”times and
limits the extent to which the burden of adjust-
ment falls on the shoulders of weaker nations
andcitizensduringthe“bad”times.
Politically, the trouble is that, unlike in
1944, today there exists no equivalent to the
then United States to convene such a confer-
ence and underpin the resulting agreement.
OnlytheG20candothiscollectively.Butwith
Europe in a state of comic idiocy and with the
UnitedStatesungovernable,theprospectsare
dim.
Chris Rogers: May we thank you for sharing
your engaging and somewhat controversial
answers with the Journal of Regulation & Risk
- North Asia and bid you luck in your effort
to seek elected office in Greece on 25th of
January. I – andthestaffattheJournal – look
forward to following your career,regardless of
theoutcomeoftheelection.•
Call for papers
Contact:
Christopher Rogers
Editor-in-Chief
christopher.rogers@irrna.org
Journal of Regulation & Risk North Asia
33
Opinion
Deregulation, non-regulation
and ‘desupervision’
Professor William Black examines thecauses of the mortgage fraud epidemic thathas swept the United States.
THE author of this paper is a leadingacademic, lawyer and former bankingregulator specialising in ‘white collar’crime.AsoneoftheunsungheroesoftheSavings & Loans debacle of the 1980s,Professor Black nowadays spends muchof his time researching why financialmarkets have a tendency to become dys-functional. Renowned for his theory on‘control fraud’, Prof. Black lectures at theUniversity of Missouri and Kansas City.He is the author of ‘The Best Way to Roba Bank is to Own One: How CorporateExecutives and Politicians Looted theS&L Industry.’ A prominent commenta-tor on the causes of the current financialcrisis, Prof. Black is a vocal critic of theway the US government has handled thebanking crisis and rewarded institutionsthat have clearly failed in their fiduciaryduties to investors.
The following commentary does not nec-essarily represent the view of the Journal ofRegulation and Risk – North Asia.
“The new numbers on criminal refer-rals for mortgage fraud in the US are just in
and they implicitly demonstrate three criti-cal failures of regulation and a wholesalefailure of private market discipline of fraudand other forms of credit risk.The FinancialCrimes Enforcement Network (FinCEN)released a study this week on SuspiciousActivity Reports (SARs) that federally regu-lated financial institutions (sometimes) filewith the Federal Bureau of Investigation(FBI) when they find evidence of mortgagefraud.
Epidemic warning
The FBI began warning of an“epidemic”ofmortgage fraud in their congressional testi-mony in September 2004 – over five yearsago. It also warned that if the epidemic werenot dealt with it would cause a financial cri-sis.Nothing remotely adequate was done torespond to the epidemic by regulators, lawenforcement, or private sector “market dis-cipline.”Instead,theepidemicproducedandhyper-inflatedabubbleinUShousingpricesthat produced a crisis so severe that it nearlycaused the collapse of the global financialsystem and led to unprecedented bailouts ofmany of the world’s largest banks.
Journal of Regulation & Risk North Asia
147
Legal & Compliance
Who exactly is subject to the
Foreign Corrupt Practices Act?
In this paper,ThamYuet-Ming, DLA
Piper Hong Kong consultant, examines the
pernicious effects of the FCPA in Asia.
The US Foreign Corrupt Practices
Act (FCPA), has its beginnings in the
Watergateera,whentheWatergateSpecial
Prosecutor called for voluntary disclo-
sures from companies that had made
questionable contributions to Richard
Nixon’s 1972 presidential campaign.
However, these disclosures revealed
not just questionable domestic payments
but illicit funds that had been channelled
to foreign governments to obtain business.
The information led to subsequent investi-
gations by the US Securities and Exchange
Commission (SEC) which revealed that
many US issuers kept “slush funds” to
pay bribes to foreign officials and political
parties.
The SEC later came up with a voluntary
disclosure programme under which any cor-
poration which self-reported illicit payments
and co-operated with the SEC was given
an informal assurance that it would likely
be safe from enforcement action.The result
was the disclosure that more than USD$300
million in questionable payments (a mas-
sive amount in the 1970s) had been made
by hundreds of companies – many of which
were Fortune 500 companies.The US legis-
lature responded to these scandals by even-
tually enacting the FCPA in 1977.
There are two main provisions to the
FCPA – the anti-bribery provisions, and the
accountingprovisions. BoththeSECandthe
US Department of Justice (DOJ) have juris-
diction over the FCPA. Generally, the SEC
prosecutes the accounting provisions and
the anti-bribery provisions as against issuers
throughcivilandadministrativeproceedings
whereas the DOJ prosecutes companies and
individuals for the anti-bribery provisions
through criminal proceedings.
The anti-bribery provision
The FCPA’s anti-bribery provision makes it
illegal to offer or provide money or anything
of value to foreign officials (“foreign”mean-
ing“non-US”) with the intent to obtain or
retain business, or for directing business to
any person.
Anything of value can include sponsor-
ship for travel and education, use of a holi-
day home, promise of future employment,
discounts, drinks and meals. There is no
Journal of Regulation & Risk North Asia
163
Risk management
Of ‘Black Swans’, stress tests &optimised risk management
Standard & Poor’s David Samuels
outlines the positive benefits of bank stresstesting on the bottom line.It is a big challenge for banks to build
a robust approach to managing the risk
of worst-case stress scenarios that, almost
bydefinition,aretriggeredbyapparently
unlikely or unprecedented events.
However, solving the problem of identi-
fying the risk concentrations and dependen-
cies that give rise to worst-case outcomes is
vital if the industry is to thrive – and if indi-
vidual banks are to turn the lessons of the
past two years to competitive advantage.Banks that tackle the issue head-on will
be lauded by investors and regulators in the
coming years of industry recuperation and,
most importantly,will be able to deliver sus-
tained profitability gains. Meanwhile, banks
that are well placed to take advantage of the
consolidation process need to be sure they
can understand the risks embedded in the
portfolios of potential acquisitions.To improve enterprise risk management
and strengthen investor confidence,we think
bankscantaketheleadinthreerelatedareas:Better board and senior executive over-
sight and control of enterprise risk man-
agement; re-invigorated stress testing and
downturn capital adequacy programs to
uncoverriskconcentrationsandriskdepend-
encies, and; applying these improvements
to drive business selection – for example,
through performance analysis and risk-
adjusted pricing that takes stress test results
into account.
Top-level oversightBuilding a more robust and comprehensive
process for uncovering threats to the enter-
prise is clearly, in part, a corporate govern-
ancechallenge.Theboardandtopexecutives
must have the motivation and the clout to
scrutinise and call a halt to apparently profit-
able activities if these are not in the longer-
term interests of the enterprise or do not fit
the intended risk profile of the organisation.
But contrary to popular opinion,improv-
ing corporate governance is not just a ques-
tion of putting the ‘right’ executives and
board members in place and giving them
appropriate incentives.
For the bank to make the right deci-
sions when they are difficult, e.g. when
business growth looks good in the upturn,
or when risk management looks expensive
JOURNAL OF REGULATION & RISK
NORTH ASIA
Journal of Regulation & Risk North Asia
135
Compliance
Global financial change impacts
compliance and risk
EastNet’s head of products management –
compliance, David Dekker, details a potent
chemical reaction in financial markets.
About a year ago we saw the first signs
ofatransformationinthefinancialworld
and in the last months the credit crisis
has transformed the financial world at
an explosive pace. the change that is
occurring is much broader in scope than
originally expected. banks that were
considered to be too big to fail or fall
are either failing or being taken over by
financial institutions that are more finan-
cially sound, resulting in a huge para-
digm shift in how banks are regarded by
the public and other banks.
Since banking largely revolves around
trustandtheabilitytoservicecustomers,los-
ing a customer and determining the impact
of it, should be part of the ongoing risk
management of the organisation, as well as
monitoring the riskiness of existing and new
products and the customers using/buying
these products. But there are more changes
and challenges in the banking world that are
threatening banking as we have known it.
The banks will, in the future, not be the
default vehicles by which to move our funds,
maintain our balances and portfolios; they
will just be one of companies amongst oth-
ers that will be able to offer these services.
These days we should rather speak about
financial institutions than banks, or moni-
tored financial service providers,a name that
covers their current and future activities.
Look at how rapidly we have moved
from physical interaction on the banks
terms (location and hours of operation) to
electronic payments then Internet banking.
Again the banks were still in charge, but
as mentioned the paradigm is shifting to a
world where we (physical persons and cor-
porations) pay each other without the banks
involvement with new technologies such as
mobile payments.
Network providers
In the future the banks and organisations
such as SWIFT, NACHA and other pay-
ment networks become network providers
that allow you to send money from A to B
and will charge you for the network traf-
fic that you generate. This brings similari-
ties with industries such as telecom, energy
suppliers and cable companies.The financial
world is clearly undergoing an important

17. Opinion
The four lemmings of
quantitative easing
YaleeconomistStephenRoachurgestheECBto
takealonghardlookatitsquantitativeeasing
road-to-nowherebeforeit’sfartoolate.
PREDICTABLY, the European Central
Bank has joined the world’s other
major monetary authorities in the great-
est experiment in the history of central
banking. By now, the pattern is all too
familiar. First, central banks take the
conventional policy rate down to the
dreaded “zero bound”. Facing continued
economic weakness, but having run out
of conventional tools, they then embrace
the unconventional approach of quanti-
tative easing.
The theory behind this strategy is simple:
unable to cut the price of credit further, cen-
tral banks shift their focus to expanding its
quantity. The implicit argument is that this
move from price to quantity adjustments
is the functional equivalent of additional
monetary-policy easing. Thus, even at the
zero bound of nominal interest rates, it is
argued, central banks still have weapons in
their arsenal.
But are those weapons up to the task?
For the European Central Bank and the
Bank of Japan, both of which are facing for-
midable downside risks to their economies
and aggregate price levels, this is hardly an
idle question. For the United States, where
the ultimate consequences of quantitative
easing remain to be seen, the answer is just
as consequential.
The“three Ts”
Quantitative easing’s impact hinges on the
“three Ts” of monetary policy: transmis-
sion (the channels by which monetary
policy affects the real economy); traction
(the responsiveness of economies to policy
actions); and time consistency (the unwa-
vering credibility of the authorities’promise
to reach specified targets like full employ-
ment and price stability).
Notwithstanding financial markets’
celebration of quantitative easing, not to
mention the US Federal Reserve’s hearty
self-congratulation,an analysis based on the
three Ts should give the European Central
Bank cause for pause.
In terms of transmission, the US Federal
Reserve has focused on the so-called wealth
effect. First, the balance-sheet expansion of
some US$3.6 trillion since late 2008 – which
far exceeded the US$2.5 trillion in nominal

18. Journal of Regulation & Risk North Asia16
gross domestic product growth over the
quantitative easing period – boosted asset
markets.
ECB constrained
It was assumed that the improvement in
investors’ portfolio performance – reflected
in a more than threefold rise in the S&P 500
from its crisis-induced low in March 2009 –
would spur a burst of spending by increas-
ingly wealthy consumers.The Bank of Japan
has used a similar justification for its own
policy of quantitative and qualitative easing.
The European Central Bank, however,
will have a harder time making the case for
wealth effects,largely because equity owner-
ship by individuals (either direct or through
theirpensionaccounts)isfarlowerinEurope
than in the United States or Japan.
For the European Union, specifically
those members of the Eurozone, monetary
policy seems more likely to be transmit-
ted through banks, as well as through the
currency channel, as a weaker euro – it has
fallen some 15 per cent against the dollar
over the last year – boosts exports.
Traction problems
Therealstickingpointforquantitativeeasing
relates to traction.The United States, where
consumption accounts for the bulk of the
shortfall in the post-crisis recovery, is a case
in point. In an environment of excess debt
and inadequate savings, wealth effects have
done very little to ameliorate the balance-
sheet recession that clobbered US house-
holds when the property and credit bubbles
burst.
Indeed, actualised annualised real con-
sumption growth has averaged just 1.3
per cent since early 2008. With the current
recovery in real gross domestic product on
a trajectory of 2.3 per cent annual growth –
two percentage points below the norm of
past cycles – it is tough to justify the wide-
spread praise of quantitative easing.
Japan’smassivequantitativeandqualita-
tive easing campaign has faced similar trac-
tion problems. After expanding its balance
sheet to nearly 60 per cent of gross domes-
tic product – double the size of the the US
Federal Reserve’s – the Bank of Japan is
finding that its campaign to end deflation
is increasingly ineffective. Japan has lapsed
back into recession, and the Bank of Japan
has just cut the inflation target for this year
from 1.7 per cent to 1 per cent.
Denial of risks
Finally, quantitative easing also disappoints
in terms of time consistency.The US Federal
Reserve has long qualified its post-quanti-
tative easing normalisation strategy with a
host of data-dependent conditions pertain-
ing to the state of the economy and/or infla-
tion risks.
Moreover, it is now relying on ambigu-
ous adjectives to provide guidance to finan-
cial markets, having recently shifted from
stating that it would maintain low rates
for a“considerable”time to pledging to be
“patient”in determining when to raise rates.
But it is the Swiss National Bank, which
printed money to prevent excessive appreci-
ationafterpeggingitscurrencytotheeuroin
2011,thathasthrustthesharpestdaggerinto
quantitative easing’s heart. By unexpectedly
abandoning the euro peg on January 15 –
just a month after reiterating a commitment
to it – the once-disciplined Swiss National

19. Journal of Regulation & Risk North Asia 17
Bank has run roughshod over the credibility
requirements of time consistency.
With the Swiss National Bank’s
assets amounting to nearly 90 per cent of
Switzerland’s gross domestic product, the
reversal raises serious questions about both
the limits and repercussions of open-ended
quantitative easing.
Anditservesasachillingreminderofthe
fundamental fragility of promises like that
of the European Central Bank’s President
Mario Draghi to do “whatever it takes” to
save the euro.
In the quantitative easing era, monetary
policy has lost any semblance of discipline
and coherence. As Mr. Draghi attempts to
deliver on his nearly two-and-a-half-year-
old commitment, the limits of his prom-
ise – like comparable assurances by the
US Federal Reserve and the Bank of Japan
– could become glaringly apparent. Like
lemmings at the cliff’s edge, central banks
seemsteepedindenialoftheriskstheyface.•
Editor’s note: The publisher and edi-
tors of the Journal of Regulation & Risk
- North Asia would like to extend their
thanks to Stephen S. Roach, senior fel-
low at Yale University’s Jackson Institute of
Global Affairs and a senior lecturer at the
Yale School of Management, together with
Project Syndicate for allowing the Journal to
re-print an amended version of this article,
which first appeared on Project Syndicate’s
website on 26 January, 2015. Readers are
kindly reminded that copyright belongs to
Mr.Roach and Project Syndicate. The original
source material can be found at the follow-
ing website link: http://www.project-syndi-
cate.org/columnist/stephen-s--roach.
Subscribe
today
Contact:
Christopher Rogers
Editor-in-Chief
christopher.rogers@irrna.org
Articles & Papers
Issues in resolving systemically important financial institutions Dr Eric S.Rosengren
Resecuritisation in banking: major challenges ahead
Dr Fang Du
A framework for funding liquidity in times of financial crisis
Dr Ulrich Bindseil
Housing, monetary and fiscal policies: from bad to worst
Stephan Schoess,
Derivatives: from disaster to re-regulation
Professor Lynn A.Stout
Black swans, market crises and risk: the human perspective
Joseph Rizzi
Measuring & managing risk for innovative financial instruments Dr Stuart M.Turnbull
Red star spangled banner: root causes of the financial crisis Andreas Kern & Christian Fahrholz
The ‘family’ risk: a cause for concern among Asian investors
David Smith
Global financial change impacts compliance and risk
David Dekker
The scramble is on to tackle bribery and corruption
PenelopeTham & Gerald Li
Who exactly is subject to the Foreign Corrupt Practices Act?
ThamYuet-Ming
Financial markets remuneration reform: one step forward
Umesh Kumar & Kevin Marr
Of ‘Black Swans’, stress tests & optimised risk management
David Samuels
Challenging the value of enterprise risk management
Tim Pagett & Ranjit Jaswal
Rocky road ahead for global accountancy convergence
Dr Philip Goeth
The Asian regulatory Rubik’s Cube
Alan Ewins and Angus Ross
Journal of regulation & risk
north asia
Volume I,Issue III,AutumnWinter 2009-2010
Journal of Regulation & Risk North Asia
147
Legal & Compliance
Who exactly is subject to the
Foreign Corrupt Practices Act?
In this paper,ThamYuet-Ming, DLA
Piper Hong Kong consultant, examines the
pernicious effects of the FCPA in Asia.
The US Foreign Corrupt Practices
Act (FCPA), has its beginnings in the
Watergateera,whentheWatergateSpecial
Prosecutor called for voluntary disclo-
sures from companies that had made
questionable contributions to Richard
Nixon’s 1972 presidential campaign.
However, these disclosures revealed
not just questionable domestic payments
but illicit funds that had been channelled
to foreign governments to obtain business.
The information led to subsequent investi-
gations by the US Securities and Exchange
Commission (SEC) which revealed that
many US issuers kept “slush funds” to
pay bribes to foreign officials and political
parties.
The SEC later came up with a voluntary
disclosure programme under which any cor-
poration which self-reported illicit payments
and co-operated with the SEC was given
an informal assurance that it would likely
be safe from enforcement action.The result
was the disclosure that more than USD$300
million in questionable payments (a mas-
sive amount in the 1970s) had been made
by hundreds of companies – many of which
were Fortune 500 companies.The US legis-
lature responded to these scandals by even-
tually enacting the FCPA in 1977.
There are two main provisions to the
FCPA – the anti-bribery provisions, and the
accountingprovisions. BoththeSECandthe
US Department of Justice (DOJ) have juris-
diction over the FCPA. Generally, the SEC
prosecutes the accounting provisions and
the anti-bribery provisions as against issuers
throughcivilandadministrativeproceedings
whereas the DOJ prosecutes companies and
individuals for the anti-bribery provisions
through criminal proceedings.
The anti-bribery provision
The FCPA’s anti-bribery provision makes it
illegal to offer or provide money or anything
of value to foreign officials (“foreign”mean-
ing“non-US”) with the intent to obtain or
retain business, or for directing business to
any person.
Anything of value can include sponsor-
ship for travel and education, use of a holi-
day home, promise of future employment,
discounts, drinks and meals. There is no
Journal of Regulation & Risk North Asia
163
Risk management
Of ‘Black Swans’, stress tests &optimised risk management
Standard & Poor’s David Samuels
outlines the positive benefits of bank stresstesting on the bottom line.It is a big challenge for banks to build
a robust approach to managing the risk
of worst-case stress scenarios that, almost
bydefinition,aretriggeredbyapparently
unlikely or unprecedented events.
However, solving the problem of identi-
fying the risk concentrations and dependen-
cies that give rise to worst-case outcomes is
vital if the industry is to thrive – and if indi-
vidual banks are to turn the lessons of the
past two years to competitive advantage.Banks that tackle the issue head-on will
be lauded by investors and regulators in the
coming years of industry recuperation and,
most importantly,will be able to deliver sus-
tained profitability gains. Meanwhile, banks
that are well placed to take advantage of the
consolidation process need to be sure they
can understand the risks embedded in the
portfolios of potential acquisitions.To improve enterprise risk management
and strengthen investor confidence,we think
bankscantaketheleadinthreerelatedareas:Better board and senior executive over-
sight and control of enterprise risk man-
agement; re-invigorated stress testing and
downturn capital adequacy programs to
uncoverriskconcentrationsandriskdepend-
encies, and; applying these improvements
to drive business selection – for example,
through performance analysis and risk-
adjusted pricing that takes stress test results
into account.
Top-level oversightBuilding a more robust and comprehensive
process for uncovering threats to the enter-
prise is clearly, in part, a corporate govern-
ancechallenge.Theboardandtopexecutives
must have the motivation and the clout to
scrutinise and call a halt to apparently profit-
able activities if these are not in the longer-
term interests of the enterprise or do not fit
the intended risk profile of the organisation.
But contrary to popular opinion,improv-
ing corporate governance is not just a ques-
tion of putting the ‘right’ executives and
board members in place and giving them
appropriate incentives.
For the bank to make the right deci-
sions when they are difficult, e.g. when
business growth looks good in the upturn,
or when risk management looks expensive

21. Can a central bureau prevent
systemic risk? Not likely!
AlexJ.Pollock of theAEIpourscoldwateron
the belief thatthe FinancialStabilityOversight
Councilcan controlagainstsystemicrisk.
Opinion
IN a typical political over-reaction to a
financialcrisis,ashappenseachcycle,the
USCongresscreatedthenotoriousDodd-
Frank Act of 2010. Ironically, this act is
named after two of the biggest political
promoters of Fannie Mae and Freddie
Mac, the government-sponsored insti-
tutions which greatly helped inflate the
housing bubble and then failed in 2008.
The act did nothing to reform Fannie
and Freddie, but it did cultivate a vast
efflorescence of regulatory bureaucracy,
which has by now been multiplying for
four years and continues its inexorable
spread.
Among the creations of the Dodd-FrankAct
is the Financial Stability Oversight Council,
often referred too as the FSOC (called“eff-
sock”). The Financial Stability Oversight
Councilisacommitteeofregulatorsassigned
with the responsibility of identifying and
preventing the ill-defined threat of systemic
risk. It is not clear that this is even possible.
The utter failure of central banks, regulators
andeconomistsingeneraltounderstandthe
great 21st century bubbles or to foresee their
disastrousconsequencescertainlysuggestsit
is not.
This unlikelihood of success is accen-
tuated by the nature of the committee as a
congress of turf-protecting regulatory fief-
doms. But of course politicians in the wake
of a financial crisis have to be seen to be
doing something! Setting up a committee
is something which can always be done.
An analogous international committee of
central bank and regulatory bureaucracies,
the Financial Stability Board, was similarly
established.
The“Faith in Bureaucracy”Act
The FSOC has unprecedented power to
expand its own jurisdiction,escaping demo-
cratic checks and balances, by meeting in
secret to designate financial companies as
“systemically important financial institu-
tions”or SIFIs. This subjects such compa-
nies to additional regulatory controls. You
would not think that Congress would give
an unelected bureaucratic committee the
ability to expand its own jurisdiction, but
the Dodd-Frank Act displays throughout a
naïve assumption of the virtue,as well as the

22. Journal of Regulation & Risk North Asia20
knowledge, of government bureaucracies.
It should have been entitled,“The Faith in
BureaucracyAct”.
What good the committee?
Systemic risk is a readily available rationale
for the expansion of regulatory bureaucracy,
but no one has offered a clear definition of
“systemic risk”. Justice Potter Stewart of the
US Supreme Court famously said of por-
nography that he could not define it, but he
knew it when he saw it. With systemic risk,
we cannot define it, and we do not know
it when we see it, or we do not see it at all,
because we are looking somewhere else.
How good can a committee composed
of jealous regulatory fiefdoms be at knowing
systemic risk when it sees it? The problem is
exacerbated because systemic risk is created
by what we do not know,and therefore can-
not “see” intellectually.
Even more to the point, systemic risk is
caused by what we think we know, when
really we don’t. For example, the following
passages detail instances where financial
actors as a group, including regulators and
central bankers,thought they knew.
Classic“group think”failure
The classic“group think”failure prior to the
great financial crisis (GFC) of 2007-2008 was
the view that US house prices could not go
down on a national average basis. This was
plausible, given how large the United States
is and how diversified its economy. That this
idea was widely believed and acted upon
was a key factor in falsifying it, with disas-
trous consequences,needless to say.
Then we have this marvellous conten-
tion doing the rounds prior to the GFC that
central banks globally had achieved the
“Great Moderation”. Of course, the“Great
Moderation”forwhichcentralbanks,includ-
ingtheUSFederalReserve,warmlycongrat-
ulated themselves,turned out to be the great
series of bubbles.
Our delusions of grandeur are not just
confined to central bankers though. Again,
prior to the GFC, global regulators under
the guise of the Bank for International
Settlementswerealloftheopinionthatbank
capital requirements should be based on risk
weightings. It was another quite plausible
idea, believed in and worked on by thou-
sands of intelligent and diligent regulators
and bankers. It led to thoroughly unsound
heights of leverage.
Can it get worse? You bet!
Of course, this would all have not been
possible without the fact that new finan-
cial techniques in risk management justify
higher leverage, allegedly. Techniques such
as tranched mortgage-backed securities,
structured investment vehicles (SIVs), and
credit default swaps (CDSs) were all clever
structures created by clever people, but
could not survive what turned out to be their
hyper-leverage to house prices falling (see
first item in this list).
Such group think and delusions are not
confined to one specific group or agency.
All regulators and central bankers are gov-
ernment employees, which leads us to this
blinder that government debt is“risk free”.
Of course it is understandable that they
wanttopromotethedebtoftheiremployers:
the governments and the politicians who
control them.
Still, this idea was particularly silly, given

23. Journal of Regulation & Risk North Asia 21
the large number of government defaults
that litter financial history.
“Countries don’t go bankrupt”
Last, but not least in our list, is the view
held by many that “Countries cannot go
bankrupt”. This memorable line of Walter
Wriston, the Chairman of what was then
Citicorp,helpedleadtheparadeofbanksinto
the tar pit of the sovereign debt crisis of the
1980s. This parade had been cheered on by
official voices as the success of“petro-dollar
recycling”. Of course, it is true that countries
don’t enter bankruptcy proceedings – quite
the reverse,they just default.
Did the bureaucracies, which are now
members of Financial Stability Oversight
Council, in previous crises see in advance
that all this“knowledge”was false,any better
than anybody else? Nope. Are they exempt
from cognitive herding? Nope. Will they
have superior insight into the false beliefs
and fads of the next crisis? That is most
improbable.
Government is much to blame
A deep and fundamental problem of a
government committee like the Financial
Stability Oversight Council is that govern-
ments themselves are major creators of
systemic risk, including of course the US
government. This is especially true of cen-
tral bank money-printing blunders, like that
which set off the hugely destructive Great
Inflation of the 1970s, or that which stoked
the US housing boom as it turned into a
bubble in the early 2000s.
Indeed,the US Federal Reserve,the cen-
tral bank to the world as long as the dollar
is the dominant global currency, is itself the
single greatest creator of systemic risk and
the biggest SIFI of them all. The Federal
Reserve and the US Treasury, whose low-
rate bonds the Federal Reserve has so gen-
erously been buying, are the most senior
membersoftheFinancialStabilityOversight
Council. Is the Financial Stability Oversight
Council going to indict the actions of the
Fed, however culpable, for creating systemic
risk? Nope.
Likewise, is the Financial Stability
Oversight Council going to criticise other
parts of the government,let’s say a Congress
or a Department of Housing which pro-
motespoorqualitymortgageloansasabub-
ble expands? A Department of Education
which pushes extreme levels of student debt
with no credit underwriting? A government
pensionguarantorwhichishopelesslyinsol-
vent? No,it won’t.
Fannie and Freddie
The former “government-sponsored enter-
prises”, Fannie Mae and Freddie Mac, were
principal inflators of the US housing bubble.
They made boodles of bad loans and bought
billions in subprime mortgage-backed secu-
rities,growing in mortgage credit risk to over
US$5trillion.Theircollapseescalatedthecri-
sis of 2008.
They are now government-owned and
controlled entities, which still have over
US$5 trillion in assets and more than half
of the entire mortgage credit risk of the
country, combined with zero capital. They
demonstrably represent systemic risk,if any-
body does. But does the Financial Stability
Oversight Council designate them as sys-
temically important financial institutions?
In a nutshell, no. And, why not? Because

24. Journal of Regulation & Risk North Asia22
a committee chaired by the Secretary of the
Treasury in partnership with the Federal
Reserve, and filled with government offic-
ers, is constitutionally incapable of dealing
with the systemic risks created by the gov-
ernment. The egregious failure to address
Fannie and Freddie, in itself, deflates the
FSOC’s intellectual credibility.
In general,systemic risk reflects exagger-
ated asset prices which have become highly
leveraged. I like to ask audiences of mort-
gage lenders, “What is the collateral for a
mortgage loan?”“The house”, which seems
the obvious answer, is incorrect. The correct
answer is“the price of the house”. The price
is the only way the lender can recover value
from the collateral. The price of the asset is
what supports the debt.
The essential question about risk and
systemic risk is therefore: how much can a
pricechange? Theansweris:alotmorethan
you think. It can go up more than you think,
and it can go down a lot more than you
think. That is why your worst-case scenario
isnowherenearasbadaswhatactuallyhap-
pens in a crisis, and why risk, to paraphrase
anoldbanker,isthepriceyouneverbelieved
you would really have to pay.
How do we know how much a price
can change? How indeed? Our ignorance of
future prices has just been demonstrated yet
once again by the unforecasted more than
50 per cent drop in the price of global oil
supplies.
Will the Financial Stability Oversight
Council,staffed as it is, be better than any-
body else at knowing how much prices
will change? Did it identify the coming
collapse in the price of oil as a looming risk
factor? It did not. Given past and recent
experience, there is no reason to think it
will do any better in the future. •
JOURNAL OF REGULATION
& RISK NORTH ASIA
Editorial deadline for
Vol VII Issue I Summer 2015
May 15th 2015

25. Opinion
“The secret of great wealth is…
a crime never found out…” Balzac
Former Fraud Squad investigator,Rowan
Bosworth-Davies,lambaststhefailureofthe
politicalclasstotackleCityofLondoncriminality.
MY good friend, Ian Fraser, author of
Shredded: Inside RBS, The Bank That
Broke Britain, argues that Thomas
Piketty’s Capital in the Twenty-First
Century was perhaps the most impor-
tant book published in 2014. Similarly,
Paul Krugman, in the New York Review,
praises this tour de force by the Paris
School of Economics professor as a
“magnificent, sweeping meditation on
inequality”.
The book’s big idea is that we haven’t just
gone back to 19th century levels of income
inequality – we’re also on a path back to
“patrimonial capitalism”,in which the com-
manding heights of the economy are con-
trolled not by talented individuals but by
family dynasties. Here, I would argue, the
word “family” should be interpreted in its
widest context, to include corporate bodies
and,increasingly,criminal organisations.
Piketty’s influence runs deep. It has
becomecommonplacetosaythatweareliv-
ing in a second Gilded Age – or, as Piketty
likes to put it, a second Belle Époque –
defined by the incredible rise of the “one
per cent”. But it has only become a com-
monplace thanks to Piketty’s work. He and
his colleagues (notably Anthony Atkinson
at Oxford and Emmanuel Saez at Berkeley),
have pioneered statistical techniques that
makeitpossibletotracktheconcentrationof
incomeandwealthdeepintothepast–back
to the early twentieth century for America
and Britain,and all the way to the late eight-
eenth century for France.
The result has been a revolution in
our understanding of long-term trends in
inequality. Before this, most discussions of
economic disparity more or less ignored
the very rich. But even those willing to dis-
cuss inequality generally focused on the gap
between the poor or the working class and
themerelywell-off,notthetrulyrich;oncol-
lege graduates whose wage gains outpaced
those of less-educated workers, or on the
comparative good fortune of the top fifth of
the population compared with the bottom
fourfifths–notontherapidlyrisingincomes
of executives and bankers.
It therefore came as a revelation when
Piketty and his colleagues showed that the
incomes of the now famous“one per cent”,

26. Journal of Regulation & Risk North Asia24
and of even narrower groups, are actually
the big story in rising inequality. And this
discovery came with a second revelation:
talk of a second Gilded Age was nothing of
the kind. In America, in particular, the share
of national income going to the top one per
cent has followed a great U-shaped arc.
Risible idea of merit
BeforeWorldWarI,theonepercentreceived
around a fifth of total income in both Britain
and the USA. By 1950, that share had been
cut by more than half. But since 1980 the
one per cent has seen its income share surge
again – and in the US it’s back to what it was
a century ago.
Back then, great wealth tended to be
inherited; and the idea that today’s eco-
nomicelite arepeoplewhohavelegitimately
“earned”their position,is frankly risible.
I posit that it simply isn’t possible to
“earn” your way to significant wealth. No
one working lawfully for someone else in
an employed position, and paying full tax
contributions on that salary, as well as pur-
chasing a commensurate home property,
together with educating children in a private
manner will ever save enough money to be
considered to be sufficiently wealthy as to
enter the top one per cent.
Robber barons
Frankly, my friends, we have returned to the
days of the“robber barons”, the organised
criminal groups and dynastic families who
largely owned and controlled the wealth in
Americaattheturnofthenineteenthcentury,
and whose spiritual and criminogenic coun-
terparts are alive and well today in Russia
andpartsoftheoldformerCommunistBloc,
Pakistan, India, Malaysia, Indonesia, China,
parts of Sub Saharan Africa and the Middle
East, as well as in parts of the UK, the EU
andAmerica
We, in the West, notably London and
New York, have become the facilitators of
the movement of that criminal capital. We
have become economic prostitutes, selling
our services and our abilities to the high-
est bidder, in return for vast amounts of the
dirty criminal money that flows out of these
countries into the City of London or New
York, to be washed, cosseted, protected and
movedonintothesubterraneanworldofthe
offshore banking industry, free from over-
sight and interdiction.
New dynastic elites
My own belief is that the changes being
predicated in the UK and the USA for the
better facilitation and distribution of such
capital are leading to the emergence of a
new series of dynastic elites. These are all
closely aligned to the deliberate and sys-
tematic destruction of a socio-political sta-
tus that had deliberately sought to achieve
a far greater equality of the distribution of
wealth to a much wider subset of citizens
by engineering a deliberately“liberal”model
of economic dissemination, maintained by
elevating the power of the rule of law to a
pre-eminent position in Western Capitalist
Societies. The aim of enforcing this new
regulatory legal regime had been to protect
the new ideas underpinning the policies of
“Consensus” in the UK and of “The New
Deal”and its aftermath in the USA.
The end of World War II left the United
Kingdom with an appetite for a broader
distribution of wealth and a strengthening

27. Journal of Regulation & Risk North Asia 25
of social security, while more conservative
instincts held fast to a belief in individual ini-
tiative and private property.
Post-war intervention
The practical resolution of this tension
in politics by the two Chancellors was a
Keynesian-style mixed economy with mod-
erate state intervention (regulatory control
underpinned by statute) to promote social
goals,particularly in education and health.
The Bank of England enjoyed a centrist,
prudentcontrollingroleandoversawvarious
levels of financial borrowing policy, as well
as Exchange Controls. As with other laws
introduced during the war-time crisis, the
overriding aim was to ensure as fair a dis-
tribution of capital as possible, and to main-
tain rigid controls on speculation in capital
holdings, an unnecessary practice which it
was believed could undermine and thereby
damage both the war-time and early peace-
time economy.
Thesepolicieswerecontinuedbysucces-
sive consensualist Governments even after
the War, despite their apparent unfairness
towards the interests of the uber-rich.
Until the pips squeak
Dennis Healey, speaking at the Labour
conference on 1 October 1973, said,“I warn
you that there are going to be howls of
anguish from those rich enough to pay over
75 per cent on their last slice of earnings”.
In a speech on 18 February 1974, Healey
went further, promising he would“squeeze
property speculators until the pips squeak”
and confronted Lord Carrington, the
Conservative Secretary of State for Energy,
who had made £10m profit from selling
agricultural land at prices 30 to 60 times as
high as it would command as farming land.
The consensus on wealth redistribution
dominatedBritishpoliticsuntiltheeconomic
crisisofthelate1970swhichledtotheendof
the“Golden Age of Capitalism”and the rise
of monetarist economics. The Conservative
administration of Margaret Thatcher insti-
tutionalised a far greater emphasis on a free
market approach to government, while at
the same time dedicating itself to what was
called“the rolling back of the nanny State”
and“the dismantling of Socialism”.
Relief, Recovery, Reform
In the USA, the era of the New Deal was
underpinned by the realisation that the
seeds of the economic austerity and the era
of severe hardships caused by the collapse
of the US economy in the aftermath of the
Wall Street Crash, had been predicated, to
a great extent, by unregulated speculative
trading on margin, during which criminals
and dishonest speculators had manipulated
the US securities market so as to destroy its
very foundations.
Unregulated speculation coupled with
the highly dangerous practice of ‘naked
shorting’ or selling stock the seller did not
own, with a view to driving down the price
of the underlying security, undermined the
legitimacy of the US stock market, thus
deterring natural users from wishing to
engage with its services.
The period of economic reconstruc-
tion witnessed a huge Keynsian economic
re-engineering project. The programmes
focused on what historians call the“3 Rs”:
Relief, Recovery, and Reform. That is, Relief
for the unemployed and poor; Recovery of

28. Journal of Regulation & Risk North Asia26
the economy to normal levels; and Reform
of the financial system to prevent a repeat
depression.
Honest banking
The“Truth in Banking”legislation, coupled
with the work of the SEC, and the power of
its lawyers and investigators, working with
Justice Department Prosecutors to maintain
strict controls over the conduct of business
on American exchanges, protecting them
from predators and encouraging ordinary
men and women to invest in them,was fun-
damental to the post-depression American
Dream.
It was only the emergence of Chicago-
schoolmonetaristeconomictheoristsinboth
the US and the UK,that spelt the end of the
era of consensual politics, and the deliberate
de-regulation of financial markets.
These policies were very largely driven
by theoretical economic analyses: both
Thatcher in the UK and Reagan in the USA
had their gurus who whispered economic
radicalism in their ears.
Crooks, wiseguys and thieves
The policy, on both sides of the Atlantic, to
engage in a policy of financial de-regulation,
led to a concerted attack on the effective-
ness of the law enforcement components
which underpinned the protection of mar-
ket integrity; they were now described as
“protectionist”and“contra-preneurial”,anti-
thetical to the efficient running of a free mar-
ket. Certainly by the mid 1980s, the powers
of criminal investigatory action were being
effectively curtailed.
What the proponents of unfettered free-
dom of markets failed to realise, whether
deliberately or by mistake, was that, by
allowing greater freedoms for markets to
develop entrepreneurial skills and increas-
ing efficiency in the management or risk,
they opened the door to every crook, wise-
guy and thief, whose very existence had
hitherto been made much more difficult by
the existence of strong laws and powerful
prosecutors.
Once those powers were revoked, there
wasnothinglefttopreventthemarketsfrom
being turned into a criminal free-for-all,
which is what they rapidly became.
Prosecutions
Nevertheless, there was a clear agenda on
the part of successive Governments on both
sides of the Atlantic to play down the pro-
tectionist powers of the criminal law,leaving
the regulation of the markets in the hands
of enthusiastic amateurs, academics, and
bankers, who had every incentive to see a
continuation of the status quo.
In the UK, despite the real successes of
the prosecutions of the first Guinness trial
in 1987, which stemmed originally from the
successful investigations of Ivan Boesky and
others in the USA, quickly followed by the
even greater success of the criminal convic-
tions sustained in the BlueArrow case,these
two major city fraud cases were to be the
last prosecutions of anyone even remotely
associated with positions of power and
social significance within the City of London
Establishment.
The City and its powerful friends were
frightened rigid by the Guinness prosecu-
tion and had decided that they did not want
theconductoftheiraffairsbeinginvestigated
by Police Fraud Squad detectives – men and

29. Journal of Regulation & Risk North Asia 27
women who really were capable of quickly
grasping the innate criminality of the con-
duct alleged, and doing something swiftly
and effectively about it.
Political lobbying
Treating socially elevated financiers in the
same way as they treated East End villains
running dodgy “break-out” companies,
knocking them up in the early hours of the
morning,locking them up at Holborn police
station and treating them generally like the
criminals they undoubtedly were, was a
most unpleasant experience, and some of
the weaker blue-bloods had a tendency to
talk too much to the cops,too quickly,in the
hope of more lenient treatment.
Suchwasthesocialdamagebeingcaused
by these cases, that a concerted period of
lobbying of selected politicians, civil servants
and law officers was begun, to amplify the
perception of damage to the reputation of
UK plc being caused by such trials.
Closing of ranks
The dropping of the other Guinness cases,
coupled with the indecently swift reversal
of the convictions of the defendants in the
Blue Arrow case by the Court of Appeal,
demonstrated just how scared the politi-
cal and financial controllers of the British
Establishment had become of allowing
City fraud scandals to be dealt with by the
cops and tried by ordinary juries, who had
also demonstrated, only too well, that they
clearly understood the issues at trial and
were perfectly capable of potting the blue-
bloods and convicting them of major crimes.
After the Court of Appeal reversals in the
Blue Arrow case, a friend of mine who was
a senior lawyer at the Serious Fraud Office
told me that the message being sent down
from“the top, was that there would never
again be a prosecution along the lines of the
BlueArrow trial.”
The salient point underpinning this
entire farrago is that,ever since those days in
1989,no important City criminal scandal has
ended in the dock of the Central Criminal
Court, and the concomitant regime of lais-
sez-faire and“light touch regulation”which
has been perpetrated ever since has allowed
the banking and financial establishment to
commit crimes on a wholesale basis, secure
in the knowledge that they will never be
dealt with by the police.
Culture of impunity
If you wonder why so many bankers have
been paid so much money in the interven-
ing years, well you can make a great deal of
criminal profit in 25 years if you are secure
in the knowledge that the police will not be
looking at you! Imagine what Al Capone
or Lucky Luciano could have siphoned
off if they had known that they were free
from law-enforcement oversight, and that
is exactly the situation with regard to the
British Banking Sector in the last quarter of
a century!
In the UK, the emergence of the civil
regulatory regime that was spawned by the
passing of the Financial Services Act 1986,
began an era which gave all the appearances
of being a regulatory-positive agenda, but
which, in practice, began and continued a
concerted policy of unpicking the influence
of law enforcement.
Successiveadministrations,theSecurities
and Investments Board, the Financial

30. Journal of Regulation & Risk North Asia28
Services Authority, now the Financial
ConductAuthority,have rigidly steered clear
ofprosecutinganyoneofstatureinthebank-
ing industry.
Naming and shaming
It took many years of“naming and sham-
ing” to get the FSA to begin prosecutions
of practitioners for even the most egregious
cases of “insider dealing”, and even then,
the defendants were always relatively minor
employees, the majority of whom pleaded
guilty.
Despite this development, the FCA has
even now consistently refused to prosecute
any senior banker for any of the concerted
criminal activities which have marked out
the banking leitmotif.
You only have to look at the activities of
all the major banks in the perpetration of the
institutionalised level of PPI fraud, which
has lasted for many years,to understand the
truth of this allegation.The monies made in
the pursuit of profits and the‘grabbing of the
biggestshareofthecustomer’swallet’,which
so identified the PPI fraud era, has enriched
many bankers a hundredfold.
Drug cartels, Libor & FX
Add into this the other levels of criminal
fraud perpetrated against clients, the delib-
erate lying about the valuations of debt-
secured securities followed by the fraudulent
foreclosure on loans,the false enrichment of
bankers at the expense of clients criminally
forced out of their contractual obligations,
and you begin to see a positive policy of
criminal activity being widely perpetrated.
Then you start to look at the level of for-
eign money laundering, sanctions busting
and other breaches of anti-terror controls
being imposed by governments,many if not
most of which were routinely ignored by
the banks. HSBC led the way with billions
of dollars recovered from their money wash-
ing activities on behalf of the Mexican Drug
Cartels. Libor and Forex manipulations are
among the more recent exposés.
For these, and for other reasons, I assert
that the level of criminality is so widespread
in the banking galère that it is impossi-
ble to calculate the amount of money they
have created for themselves, and which has
been paid to them in the form of bonuses.
While their basic salaries may remain rela-
tively modest,they have more than made up
for the wealth they have absorbed through
other payment abuses and tax avoidance.
I lived through the era of change as a
detective at the New Scotland Yard Fraud
Squad, and I watched with mounting irrita-
tionandbemusementwhileperfectlyproper
cases we should have been investigating
were undermined by Government lawyers.
Later,asaregulator,Iobservedthespine-
less kowtowing of the regulatory regime
towards those who were facilitating the
movement of the growing levels of criminal
moneybeingslushedthroughtheUKfinan-
cial sector. I believe that it is now too late to
put the genie back into the bottle; we must
live with the fact that the City of London is
run by a gang of organised criminals who
makeAl Capone look positively benign.
Without their intervention, as an inte-
gral component in the onward transmission
of the billions of foreign dirty money which
comes to London, I seriously wonder how
UK plc would survive if we had to run our
affairs lawfully and properly.•

31. Leader opinion
A simple answer to the Euro
crisis exists, why not use it?
FormerLabourPartystalwartandconfidantof
Jaques Delors andYanisVaroufakis,StuartHol-
land,offers Europe awayoutofpresentcrisis.
THE electoral success of Syriza in the
recent Greek parliamentary elections
raises serious questions as to whether
the new Greek Prime Minister, Alexis
Tsipras, and his Finance Minister, former
academicandaccidentalpoliticalactivist,
Yanis Varoufakis can fulfill the political
mandate of Syriza to renegotiate Greek
debt with the “Troika” of the European
Commission,ECBandIMF–nevermind
overcome entrenched German intransi-
gence personified by Germany’s present
Chancellor, Angela Merkel.
But this is only part of the wider question of
whether the European Union can resolve
the present crisis afflicting much of the
Eurozone. As many are aware, the best way
to reduce debt and deficits is by growth, as
witnessed by US President Bill Clinton’s sec-
ond administration in the late 90s.
An answer to our present predicament
exists and was addressed by myself and
Minister Varoufakis in our Modest Proposal
announced in November 2013 in Austin,
Texas. A proposal that now provides the
framework for the negotiating position the
Syriza government ofTsipras will undertake
with Greece’s creditors in the weeks and
months ahead.
There have been three revisions to the
Modest Proposal originally outlined by Yanis
Varoufakis and myself,prior to the noted US
Economic Historian Prof.James K.Galbraith
joining our cause in 2013. The main thrust
of our proposal is based on the argument I
made to Jacques Delors (the then President
of the European Commission) in 1993 that
the deflationary debt and deficit conditions
of the Maastricht Treaty needed to be offset
by a bond financed investment recovery on
the lines of that undertaken in America by
President Roosevelt via the New Deal in the
1930s.
At that time, I recommended that these
should be issued by a European Investment
Fund, which consequently was established
in 1994 and is today a sister institution of the
European Investment Bank (EIB).
In response to the proposal of a
European Fund for Strategic Investment
(EFSI) by Polish Finance Minister Mateusz
Szczurek, Wolfgang Schäuble, the pre-
sent German Finance Minister under Frau

32. Journal of Regulation & Risk North Asia30
Merkel,hasstressedthatthereshouldnotbe
any increase in debt.
EIB bonds are not national debt
But EIB bonds and lending for project
finance do not count towards national
debt. Nor is an EFSI needed to fulfil the EIB
bond funded European recovery that the
present European Commission President
Jean-Claude Juncker made his top prior-
ity in his adoption address to the European
Parliament in July 2014.
TheEuropeanInvestmentFundcanissue
bonds to co-finance the EIB and does so by
recycling global surpluses. Thus the South
African Minister of Finance,Nhlanhla Nene,
declared at a meeting of the BRICS (Brazil,
Russia, India and China) in Washington on
September 25th last year that they would
buy eurobonds if these were to finance a
European recovery.
Neither should governments fear mar-
kets or rating agencies. When Standard
& Poor’s downgraded Eurozone member
states’debt in January 2012, it stressed that
key reasons for this decision were simulta-
neous debt and spending reduction by gov-
ernments and households, the weakening
thereby of economic growth,and inability of
European policymakers to assure any eco-
nomic recovery within their ranks.
No new criteria needed
Last year Bill Gross, when still head of the
Pimco fund, also called for European recov-
ery, stressing that pension funds needed
growth to secure retirement income,
whereas low to near zero interest rates in
Europe would not underpin said recovery,
much as is the case in the USA. Similarly,
Norway’s sovereign wealth fund has cut
its investments in private equity in Europe
because of low growth.
The Chinese CIC sovereign wealth fund
also made losses on its private sector invest-
ments after the onset of the financial crisis,
and declared that it wanted public invest-
ment projects with a maturity of at least 10
years. The Gulf States have assets of some
US$1.1 trillion presently, much of which is
under-invested or making poor returns.
Nor are any new criteria needed for an
investment led recovery. Apart from the
TENS of the Trans-European Transport
and Telecommunications Networks, the
Amsterdam Special Action Programme
of 1997 gained the agreement of the EIB
that it would invest in health, education,
urban regeneration, green technologies and
finance for small and medium-sized firms –
all areas that ECB President Draghi’s more
than US$1 trillion quantitative easing pro-
gramme will fail to reach. Eurogroup chair
Joerem Dijsselbloem recently recognised
in the Financial Times that a new institution
such as the EFSI is not needed.
Sowhatisblocking‘actionthisday’?Little
otherthantheMerkel-Schäublepresumption
thatGermanywouldhavetopay.Yetthisisnot
the case. EIB bonds are project financed, not
serviced by German or any other taxpayers.
They have no formal guarantees by govern-
ments,andhavenotneededthemsince1958.
Besideswhich,thosememberstatesthatwant
a joint EIB-EIF funded European recovery,
such as France,Italy – and Greece – need not
beblockedbyGermany.They,orJean-Claude
Juncker, could move an “enhanced coop-
eration procedure”on the European Council
whichdoesnotneedunanimity.•

33. Book review
Policy failures at the heart of
the US 2008 financial crisis
Bartlett Naylor of the Public Citizen pro-
vides a heartfelt review of Jennifer Taub’s
book charting the US mortgage debacle.
WHAT’SmostcompellingaboutJennifer
Taub’snewbook,“OtherPeople’sHouses:
How Decades of Bailouts, Captive
Regulators, and Toxic Bankers Made
Home Mortgages a Thrilling Business”,
is her authoritative argument that the
recent financial crisis did not result from
isolated policy decisions and fraudu-
lent business practices of the few years
leading to 2008. Instead, our recent Wall
Street crash played out already proven
policyfailuresfromthesavings-and-loan
(S&L) crisis of the 1980s onwards.
Even moral hazard, the surrender of disci-
pline for banks“too-big-to-fail”that epito-
mised the bailouts of 2008, Taub reminds
us, originated in 1984 with the bailouts of
Continental Illinois National Bank and suc-
cessivetaxpayerrescuesofAmericanSavings
and Loan,the largest S&L in the nation.
Professor Taub, a colleague and friend,
teaches at Vermont Law School and previ-
ously served as associate general counsel
at Fidelity Investments. With unique cre-
dentials, she can explain the intentional
complexity of Wall Street products and
Washington regulation without glossing
over contradiction and nuance.
Unlike the majority of crash pathologies
that focus on Washington players such as
Timothy Geithner’s“StressTest”, Sheila Bair’s
“BullbytheHorns”,orAndrewRoss Sorkin’s
“Too Big to Fail”,Taub’s book spends quality
time outside theWashington DC beltway.
Nobelman family
Her narrative follows real individuals,
from rogues who pillage the banks along
with their lieutenants, to regulatory chiefs
often aligned with industry interests, a few
heroes who actually understand and fulfill
their responsibility to protect taxpayers, and
finally, victims of this morass. And we meet
the Nobelman family.
The Nobelmans and their mortgage
help connect this three decade story of
dysfunction. In 1984, Harriet and Leonard
Nobelman borrowed US$68,250 for a one-
bedroom condominium. American Savings
and LoanAssociation held the loan.
Over the years,American Savings would
be bailed out several times in several reincar-
nations. In one sale, it went to Washington

34. Journal of Regulation & Risk North Asia32
Mutual. When that firm failed, it went to JP
Morgan during the height of the 2008 finan-
cial crisis, completing the more than 20 year
arc from the S&L crisis.
The Nobelmans also ran into financial
trouble when, in 1990, they lost their jobs
and encountered health problems. They
sought not a bailout,but bankruptcy relief.
The Supreme Court eventually ruled
against the Nobelmans.
Because lenders understood a mortgage
didn’t come with the same consumer pro-
tection as other loans, Taub contends that
Nobelman v. American Savings Bank gave
lenders”added incentive to place people in
homes they could not afford”.
The London Whale
Taub doesn’t pin the 2008 financial crisis on
this decision alone. For example, she runs
through a devastating critique of deregula-
tion of the last 15 years in the chapter“Legal
Enablers of the Toxic Chain”. After the banks
made reckless loans, the pools of mortgages
won lax accounting oversight with risk dis-
guised by unsupervised bets at institutions
with far too much debt.
JP Morgan, the inheritor of American
Savings, figured near the centre of that toxic
chainrightthroughtothenotoriousLondon
Whale bets of 2012 that dramatised banking
too big to manage and regulate.
Responding to the 2008 crash, reformers
brought many ideas to Congress, including
reversal of the Nobelman decision.The real
impact, Taub recounts, would be in loan-
making itself. With the potential for bank-
ruptcy, economists of the Cleveland Federal
Reserve Bank speculated that it “worked
without working”, as loan makers would be
less likely to make unaffordable loans in the
first place, and seek an out-of-court settle-
ment in the case of problems.
Following passage in the House of
Representatives of a “principal reduction”
measure, Sen. Richard Durbin (D-Ill.) pro-
posed a parallel reform in the Senate.But he
ran into a buzz saw of 60 financial service,
insuranceandrealestatefirmsthatunloaded
US$40 million in lobbying in the first quarter
of 2009 to fight this and other reforms.
President Barack Obama, who originally
endorsedtheideaasapresidentialcandidate
in the Primaries, reversed course under the
advice of his newTreasury SecretaryTimothy
Geithner. Durbin’s measure drew 45 votes,
all Democrats. Without White House sup-
port, it fell short.“Obama gave it away on
the way to the White House,” concluded
Barney Frank, the Massachusetts Democrat
who chaired the House Financial Services
Committee.
Taub frequently notes the pernicious role
of money in financial policy, both in large
dollar flows and in micro-deals. For exam-
ple, Lewis Ranieri, the originator of mort-
gage-backed securities, sought a favourable
tax ruling on a proposed structure, but ran
into opposition from aTreasury Department
analyst. So Ranieri“hired the analyst away
from theTreasury”. Such mischief forms the
tapestry of policy.
“Other People’s Houses”achieves numer-
ous goals – history, deconstruction of finan-
cial products,policy critique.Throughout her
book, Taub returns to the real people who
suffer at the hands of financial rogues and
their legal enablers.Too often, these victims
appear as statistics; Taub reminds us they
have real names.•

35. Book précis
Life, Liberty and the pursuit
of Inequality
NewYork-basedtraderSteveWunschmakesan
impassionedpleathattheUSAreturntopastmeth-
odsthatunderscoredits“Liberty”andprosperity.
IS the stock market rigged? Are inter-
est rates, currencies and commodities
manipulated and rigged, too? Yes, say
regulators. But not to worry, they say.
We’re onto it. We’re writing new rules
andfiningtheperpetratorsbillions.Soon
we’ll put a few behind bars, so this never
happens again. Should we breathe a sigh
of relief? Or should we worry anew?
Unfortunately, we should worry.
In my new book, Life, Liberty and the pursuit
of Inequality, I show how the freedoms of
the English-speaking peoples led to pros-
perity precisely through the ability of stock
exchange founders to design and run their
markets as they saw fit, without input or
oversight from regulators. Did this result in
rigging?Yes, it did. But their rigging created
the paradigm that enabled London and
New York to lead their countries and, ulti-
mately, the world, toward the first glimmers
of self-sufficiency and wealth for all.
That paradigm, which I call the“do-it-
yourself monopoly”, first appeared tenta-
tively around 1690 in London as forerunners
of the London Stock Exchange, and then
moved around 1790 to New York as fore-
runners of the New York Stock Exchange,
but this time explicitly, as evidenced by such
documents as the Buttonwood Agreement.
As the “do-it-yourself monopoly” reached
full flower with the robber barons in the
latter part of nineteenth century America,
it underwrote a succession of the world’s
wealthiest men and the world’s biggest
businesses, as the United States became the
world’s greatest economic power.
Principles of liberty abandoned
Today, the evident economic malaise of the
wealthy western countries is traceable to
their having abandoned the principles of
freedom that made them wealthy, in par-
ticular with regard to how they design and
run their capital markets.The collapse of the
US initial public offer (IPO) market’s abil-
ity to fund new technology companies and
industries is examined in detail and seen as
the clear consequence of this abandonment.
And the rest of the west is following the
US’s lead in this and many other instances
incompatable with notions of “liberty”.
Scores of global regulators, including

36. Journal of Regulation & Risk North Asia34
over a dozen in the United States alone, are
now pushing principles pioneered over the
last four decades by the US Securities and
Exchange Commission (SEC).Following the
SEC’s guidance, they are reshaping capital
markets so as to eliminate manipulation,
rigging, spoofing and other vestiges of old-
fashioned human intermediation as they
force markets to be transparent, fair, com-
petitive and,above all,electronic.
Over-regulation dooms economies
The regulators are confident they are on the
right track, and have thousands of pages of
laws and regulations to back them up, such
as Dodd-Frank and the National Market
System in the US, the Markets in Financial
Instruments Directive (MiFID) in Europe,
and similar rules in Canada, Australia and
other countries. But the problem is that
these well-meaning regulators are actually
eliminating the whole value that markets
once had to society,which was to create new
companies and jobs.
Thus, regardless of whether govern-
ments succeed with their extraordinary fiscal
and monetary interventions, such as auster-
ity and quantitative easing, the big surprise
will be that the intervention they are most
certain of – bringing transparency, fairness,
efficiency, etc. to capital market structure –
will in fact be what dooms their economies.
Imaginary harms
And the confidence they are trying to revive
will not do so, because lack of confidence is
now a permanent accompaniment of regu-
lators’politicalambitions,aself-perpetuating
narrative that constantly renews itself on
their alleged ability to address what I show
to be imaginary harms. Investors never did
complain about regular continuous equity
market trading costs, which always had
seemed low and reasonable to them.
Now, under high frequency trading
(HFT), costs are down 90 per cent from
where they were – and the public is furious.
They hear HFT is a rigged game, so they
know they’re getting ripped off somehow,
even if they’re not, and even though they
have no way of assessing the practical value
to them of the SEC’s complex and confusing
creation.
And why would anyone complain about
fixings, when everyone got the same price
whether they were buyers or sellers? The
answer is, they didn’t. There was safety in
numbers in those fixings: lots of people both
buying and selling at the same time and
price. So they naturally trusted the bankers
who got them the fixing price. But regula-
tors saw that intermediaries must have been
making something somewhere, so they
busted the bankers for rigging.
Loss of safety in numbers
Customers now see in the news that bank-
ers are abandoning fixings and skittish
about participating lest they get fined again.
And since everyone now knows fixings are
rigged, courtesy of the reformers’ self-justi-
fying narrative, customers are less interested
anyway.The net effect is that fixings are los-
ing the safety-in-numbers characteristic that
was their chief attraction.
In short, in order to restore confidence,
regulators created HFT in stock markets,
which all investors hate,and they turned fix-
ings into fraught affairs that customers are
scared of. But never mind confidence. The

37. Journal of Regulation & Risk North Asia 35
regulators’accidental assault on confidence
is the least of our worries, as I show in some
detail by looking both back a few centuries
to see how markets should be run,and then
ahead to the future to show what we will be
missingbyhavingthemrunbyregulatorson
opposite principles.
Historical drivers of prosperity
If markets had been run on the principles of
modern regulators when they were form-
ing, they would not have formed in the
first place. And since, as I also show, the
exchanges were the essential triggers of the
Industrial Revolution, blocking them would
have prevented the Industrial Revolution
from emerging, which would have meant
that this extraordinary historical event that
beganliftingtheworld’speopleoutofseem-
ingly permanent and universal poverty,
would not have happened,either.
As demonstrated by my re-examination
of some authoritative but overlooked his-
torical works, the principles that pertained
when the New York Stock Exchange and
London Stock Exchange were forming are
the key to understanding such mysteries as
what triggered the Industrial Revolution in
the first place, why it was originally only a
British phenomenon, and why it eventually
left Britain and settled inAmerica.
Killing, actual killing
This chain of logic also shows that modern
regulation would have prevented the emer-
gence of the British Empire and the United
States as dominant economic powers. But
these are not just retrospective curiosities.
As I also show, the same regulatory princi-
ples are killing the prospects for prosperity
today across the world, with the United
States leading the downturn. And it’s not
just money.
The same forces that are killing jobs are
alsobehindthekilling,actualkilling,ofmany
people. The tolerance of inequality that
America’s founders and the British before
them invented with their freedoms was not
only the foundation of prosperity, but it was
also the foundation of peace.
Its absence today is the cause of the
national and global conflicts over inequality
that underlie the “haves versus have-nots”
disputes that are erupting in violence from
Ferguson, Missouri to Paris, France, to Iraq
and Syria. The English-speaking peoples
once led the world’s peoples to tolerance
for inequality.The question now is, can they
lead them back?
We can turn back the tide
The signs are not positive.On current trajec-
tory, the more likely evolution of the global
disputesoverinequality,ofwhichtheWaron
Terrorismisbothacauseandaconsequence,
is toward atrocities that will result in millions
of deaths. While these trajectories cannot
be altered by“democratic debate”, as advo-
cated by the likes of France’sThomas Piketty
– Capital in the Twenty-First Century – and
other inequality gurus, I suggest there is a
way to rescue the nations and peoples of the
world from these impending tragedies.And
thatisbyeliminatingthecauseofourcurrent
problems: the SEC.
By removing this scourge, we can break
up the logjam blocking both the free flow of
capital and the human interaction of indi-
viduals working to improve themselves that
is the real source of peace.•

39. Journal of Regulation & Risk North Asia 37
Letter from an economist
Isagovernmentsurplussustainable,
neverminddesirable?
Heterodox economist Prof. Steve Keen shows
how government obsession with surplus
budgets is antithetical to financial stability.
THE preventive arm of the European
Union’s Stability and Growth Pact speci-
fiestherequirementofa“closetobalance
orinsurplus”positionformemberstates’
government budgets. In this “opinion
brief”, I want to consider whether a sus-
tained government surplus is possible,
by considering its monetary impact on
the private sector.
In order to simplify this analysis I will ini-
tially ignore the external sector (exports and
imports plus net foreign payments), and
divide the economy into two sectors, these
being the private sector and the government
sector. If the government runs a surplus,
then government taxes on the private sector
exceed the subsidies paid to it by the gov-
ernment. This necessitates the running of a
deficit by the private sector with the govern-
ment. Let’s call the difference between taxes
and government subsidies “NetGov”. The
flow of funds to the government of NetGov
has to be matched by a private sector defi-
cit of exactly the same amount, as shown in
Figure 1 (where a surplus is shown in black
and a deficit in red).
The question now arises as to how
exactly the private sector generates the flow
ofmoneyneededtofinancethegovernment
surplus. It could run down its existing stock
ofmoney;butthatmeansashrinkingprivate
sector, when the objective of the govern-
ment surplus is to enable economic growth
to occur.
So for the government to run a surplus,
and for the economy to grow at the same
Government:
surplus = NetGov
Private:
deficit = NetGov
Figure 1: A two-sector picture of the
economy.

40. Journal of Regulation & Risk North Asia38
time, the private sector has to produce not
only enough money to finance the govern-
ment surplus, but also enough money for
the economy to grow as well.
How can it do this?
There is only one method to achieve this,
namely the non-bank subsector has to bor-
row money from the bank subsector.As the
Bank of England recently emphasised, bank
lending creates money (see Money Creation
in the Modern Economy, Michael McLeay;
Amar Radia and Ryland Thomas, Bank of
England Quarterly Bulletin, 2014 Q1, pp.14-
27).Bankcreationofmoneybylendingmust
therefore exceed NetGov.
To represent this we need a three-sector
model, with the non-bank sector borrowing
from the banks. Let’s call the flow of funds
from the banking sector to the non-bank
sector “NetLend”.Then for the government
to run a surplus, and for the private non-
bank sector to grow at the same time, the
banking sector has to run a deficit: new
lending (money going out of the banking
sector) has to exceed loan repayments and
interest (money coming into the banking
sector).This situation is shown in Figure 2.
Indebtedness to banks
The private sector’s money stock is grow-
ing at the rate of NetGov + NetLend, but
its indebtedness to the banks is growing at
the faster rate of NetLend (since NetGov is
negative). This combination of a growing
economy, and a government sector surplus,
means that the rate of growth of private sec-
tor debt has to exceed the rate of growth of
the private non-bank’s money stock. The
privatesector’snetindebtednessmustthere-
fore grow faster than the economy.
Clearly this cannot go on forever, for at
some point the non-bank sector will stop
Government:
surplus =
NetGov
Private:
surplus =
NetGov + NetLend
Banks:
deficit =
NetLend
Figure 2: A three-sector model to
explain how the private sector can
finance a government sector surplus
and still grow.
Government:
surplus =
NetGov
Private:
deficit =
NetGov + NetLend
Banks:
surplus =
NetLend
Figure 3: A shrinking private sector
whereby the private sector desists
from borrowing and repays debt.